This chapter aims to put light on the PAT and related empirical studies and identify its broad contributions to the accounting research.Our objective is to provide a review of extant literature in order to synthesize findings, identify areas of controversy in the literature, and evaluate critiques.The positive accounting theory (PAT) relied in great part on work undertaken in economics and was heavily reliant on the efficient market hypothesis, the capital assets pricing model, and agency theory.
In fact, positive research in accounting started coming to prominence around the mid-1960s and had been a vector of paradigm shift within the financial accounting research in the 1970s and 1980s.
The term “positive” refers to the theory that attempts to explain and make good predictions of particular phenomena.
Boland and Gordon assert that this economic-based accounting theory is a combination of Milton Friedman's instrumentalism and Paul Samuelson's positivism .
They also add that Watts and Zimmerman practise the methodology as that of the Chicago School economists [6, 15].
It is said that PAT seeks to predict and explain why managers choose to adopt particular accounting methods in preference to others but says nothing as to which method a firm should use.
We believe that PAT and its hypotheses will continue to be a rich field of empirical research and the basic questions that it raises are still relevant today.In other words, their major aim is to explain and predict why managers and accountants choose particular accounting methods in preference to others.Furthermore, they assert that firm's attributes, such as leverage and size, are predictive variables of the firm's accounting choice.Another significant explanation of the PAT's development is the strong influence of several academic works on positive economic theory, efficient markets hypothesis, CAPM, agency theory, and capital markets researches (Table 1).Watts and Zimmerman aimed to develop an economic-based accounting theory and they advance an empirical methodology that focus on economics-based explanations and predictions of accounting practice.We then investigate its foundations using the works of Watts and Zimmerman.We describe how empirical studies added unique insights into its development. Finally, we outline and discuss the significant contribution of PAT to our understanding of corporate reporting practices.The term “Positive Accounting Theory” has come to practise to refer to the accounting theory developed and named by Watts and Zimmerman.The authors seek to appreciate and explain the concept of economic consequences of the interests of managers and financial accounting and reporting.We conclude that this theory has generated several useful insights on managers' reporting decisions.In this section, we examine the forces and the publications that had a major impact on the emergence of PAT.